TMI Blog1950 (3) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... as such agents shall be as follows:- (a) From and after the 1st day of January, 1918, a commission upon the annual net profits of the said company calculated in the manner following that is to say:- Commission at the rate of 5 per cent upon the net profits of the company (calculated as below) whether dividends are declared upon the share capital of the company or not; and in such year or years as the ordinary shareholders receive a dividend exceeding 8 per cent and not exceeding 10 per cent, at the rate of 7 per cent upon the said net profits; in such year or years as the ordinary shareholders receive a dividend exceeding 10 per cent and not exceeding 12 per cent, at the rate of 8 per cent upon the said net profits; and in such year or years as the ordinary shareholders receive a dividend exceeding 12 per cent, at the rate of 9 per cent upon the said net profits. Provided that in no year shall the agents' remuneration be less than the sum of ₹ 50,000 which amount shall be due and payable to them in each year whether a dividend shall be declared upon the share capital of the company or not and whether the company shall make any profits or not, the said sum of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hts and to finance and carry on any business concern or undertaking so acquired and to search for win work get calcine reduce amalgamate dress refine and prepare for the market any quarts or ore and mineral substance and generally to buy sell manufacture and deal in manganese ore minerals and mineral products plant and machinery and other things capable of being used in connection with mining or metallurgical operations and to lay out land for building purposes and to construct carry out maintain improve and work road ways, tramways, railways, bridges, reservoirs, canals, water courses, viaducts, hydraulic works, chemical works, stamps factories, warehouses and other works of the said company and to enter into arrangements with any Government or Authorities Supreme Municipal Local or otherwise and to obtain from any such Government or Authority all rights concessions licenses leases and privileges and to institute conduct defend compromise refer to arbitration and abandon legal and other proceedings and claims by and against the said company and the directors and officers of the said company and otherwise concerning the affairs of the said company and to purchase provide maintain a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As in the last year, the managing agents have decided to bear half of the sum. In accordance with the terms of that resolution, the assessee company paid a sum of ₹ 52,000 as its half share of the special bonus, but recovered ₹ 13,000 out of that sum from the co-sharers who received 25 per cent of the managing agency commission. The assessee company claimed the balance of ₹ 39,000 as an admissible expenditure. Similarly, the assessee company agreed to pay ₹ 45,500 for the calendar year 1943. It recovered ₹ 11,375 from the cosharers and claimed the balance of ₹ 34,125 as an admissible expenditure. The Income-tax authorities disallowed the claims of the assessee company. In the appeal to the Tribunal against these disallowances, the following four contentions were raised:- (i) The payment was dictated by considerations of business prudence and with a view to maintain and carry on the agency profitably and the managing agents were obliged to agree to the reasonable request of the directors of the managed company and meet part of the expense in payment of the special bonus. The Tribunal dealt with this contention in paragraph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of a special remuneration to him. Since the Tribunal decided on other grounds that the amount claimed was inadmissible as a deduction, it did not, under the circumstances, consider it necessary to refer to materials pertaining to this contention put forward on behalf of the assessee company. It has been pointed out on behalf of the assessee company that similar payments in respect of half share of the special bonus were made by it in the accounting years 1939, 1940 and 1941 and were allowed as permissible deductions by the Income-tax Officer. The amounts involved in those years were ₹ 26,000, ₹ 30,000 and ₹ 45,000 respectively. This statement was found to be correct on being subjected to verification by reference to the assessment orders relating to those years and to relevant statements in connection therewith. Having given the above facts of the case, as directed by the Honourable High Court, we are referring the following questions of law for its opinion:- For the assessment year 1943-44 and chargeable accounting period 1st January, 1942, to 31st December, 1942. Whether in the circumstances of the case, the sum of ₹ 39,000 pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany is entirely dependent upon the profits earned by the managed company and therefore the assessee company is directly and vitally interested in the earning of the profits by the managed company. The Tribunal held that the assessee company was not entitled to the deductions they claimed and perhaps the principal reason that weighted with the Tribunal in coming to that conclusion was that the profits of the relevant accounting year had already been earned and the bonuses were paid subsequent to the earning of these profits and therefore there was no connection between the payment of the bonus and the earning of the profits in the year of account. I entirely and with very great respect agree with what their Lordships of the Privy Council stated in the case of Tata Hydro-Electric Agencies v. Commissioner of Income-tax [1937] 5 I.T.R. 202, 209. In that case their Lordships recognised, and decided cases show, how difficult it is to discriminate between expenditure which is and expenditure which is not solely expended and incurred for the purposes of earning profits or gains, but however difficult the task it has got to be attempted and we have to decide whether this particular deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any would also tend to increase the income and profits of the assessee company. Therefore it cannot be suggested that the assessee company had an indirect or ulterior motive in making this payment. The only motive by which it was actuated was a purely commercial and pecuniary one and that was to see that more profits were made by the managed company so that its own commission should thereby be increased. The Attorney-General has drawn our attention to Section 10(2)(x) and has pointed out that the Legislature has controlled by certain limitations which it has laid down the payment of bonus by an employer to an employee and it is not open to an employer to pay any bonus to an employee and claim the payment of that bonus as a permissible deduction. It is only a reasonable bonus falling within the limitations laid down in Section 10(2)(x) that can be claimed by an employer as a permissible deduction and the Attorney-General's argument is that if we allow the claim of the assessee company, then what we would be doing would be to permit the employer of the managed company to pay a bonus and claim a deduction under Section 10(2)(x) and then permit the assessee company to pay as and by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommissioner of Income-tax [1933] 1 I.T.R. 129. In that case a lump sum was paid by an assessee as compensation for the loss of agency which was caused to its managing agents by the managing agency being terminated and instead of having to pay a recurring sum every year the assessee compounded its liability in a lump sum. The question that arose for the consideration of the Calcutta High Court was whether this payment was a permissible deduction. The two points which Sir George Rankin had to consider in his judgment were: (1) whether the payment was made solely for the purpose of earning profits, and (2) if so, the payment was made in the year of account. With regard to the first point the learned Chief Justice stated that if it appeared from the assessee's own case or the facts found that the payment was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business management, the deduction would not be permissible, but as no such suggestion had been made there was no reason why the deduction should be disallowed. In my opinion in the case before us also the payment is not wholly gratuitous nor is it for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner whether the payment by the managing agents of a part of their commission in order to induce the person to whom this commission was assigned to give a loan to the managed company in that case was a permissible deduction and they held that it was. According to the learned Chief Justice the arrangement made by the managing agents was the wisest which could be made under the circumstances and the Chief Justice emphasised that in a commercial sense the payment of this share of the commission was an expenditure solely for the purpose of earning profits and gains, viz., the retention of the commission agency. In my opinion in this case also, testing it by a purely commercial test the assessee company has acted very wisely in sharing the bonus with the managed company in order that their own profits should be safeguarded and if possible increased. We were also referred to a case reported in 8 Tax Cases at page 676 (Robert Addie Sons Collieries v. Commissioners of Inland Revenue). There also the question was whether a certain sum was a capital or revenue expenditure. But what was relied upon by Sir Jamshedji was the observation of Lord President Clyde on the question whic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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